Rising compliance costs rupturing banks' trade finance relationships

Collaboration between transaction banks and Swift is helping to spread the burden and rocketing cost of compliance, but for some banks' trade finance businesses, client relationships have already been hit hard by the expense.

It's a similar story throughout the banking industry where
the onslaught of new
financial regulation and cost of complying with it has
forced banks to adapt or even close banking
businesses.

Trade finance activity, in particular, was threatened by the
proposed leverage ratio under Basel III until earlier this
year when global regulators agreed to water it down, marking a
small win for the industry.

However, the burden and rising costs of complying with
know-your-customer and
anti-money laundering regulations and sanctions continues
to impact banks' trade finance businesses, and to the point
where some banks have no other option than cutting trade
relationships all together with clients, according to Ruediger
Geis, senior product manager for trade products at
Commerzbank.

Sometimes we get contradictory information from the
regulators – one says to move left and the other
says to move right

Ruediger Geis

"Some banks are closing down relationships," he says.
"If you have to do KYC properly, you may have to invest between
$15,000 and $50,000 [to achieve adequate due diligence on a
single client]. For smaller banks, this can affect
relationships. If you have a limited number of transactions it
can reduce the appeal of working in a country."

Indeed, the sheer depth and specificity of information
required for each trade finance transaction can be burdensome,
and an inability to collect qualitative and quantitative
information – especially in emerging markets where
requests for documentation, such as a supplier’s
articles of incorporation, can be met with bewilderment
– are making it much more difficult for banks to lend.

Further complicating the issue is the lack of
consistency in the quality of due diligence, under law, from
country to country. For instance, what may be permissible in
one country could turn out to be illegal in another, making
banks vulnerable to massive fines or even criminal
proceedings.

That KYC customer standards vary from country to
country is problematic, and simply means a company from one
country might not be vetted appropriately within the
counterparty’s own country, raising counterparty
risk issues.

For Geis, their needs to be greater consistency in global
regulators approach to this, and across the board. "Sometimes
we get contradictory information from the regulators –
one says to move left and the other says to move right," he
says.

Having a single, centralized registry for
up-to-date KYC information will reduce the time, effort and
cost related to gathering, accessing and sharing KYC
information," says Pascal Augé, head of global
transactions and payment services at Société
Générale.

Société Générale was one of the
first international banks – alongside Bank of America
Merrill Lynch, Citi, Commerzbank, JPMorgan and Standard
Chartered – to have signed up to the registry, which
as of this month now has the support of Barclays, Deutsche
Bank, Erste Group Bank, HSBC, ING and Raiffeisen Bank
International. A third set of banks is expected to follow suit
in September.

"Collaboration is playing a major role in the development of
this industry-driven initiative," says Luc Meurant, head of
banking markets and compliance services at Swift. "Banks want
to collectively address the challenges around KYC
compliance."

The registry is in a pilot phase, but it is expected to go
live at the end of this year.

Streamlining

Although it will help to streamline processes, the list of
documentation needed is not short. These include certificates
of registration, banking licences and responses to the
Wolfsberg anti-money laundering questionnaire.

The registry will pool together the information to create a
system that will fulfil the requirements with a standardized
set of information that is required to meet the demands of due
diligence. The liability for the accuracy of the documentation
lies with the holding institution, although Swift will take
steps to check it.

When live it will have substantial reach, being available to
the 7,500 correspondent banks that are placed along the Swift
network.

Paul Taylor, director of client services at Swift, explains
that the each organization contributes its own due-diligence
information, providing details when requested by its
counterparties.

Through working collaboratively, a set of standardized
documentation and data sets has been created and honed by this
initial pilot group. Each organization also crucially maintains
control of the information it provides.

While the Swift registry is receiving growing support from
the banking industry, it is not the only platform focused on
addressing this issue.
KYC Exchange Net (Ken) launched at the beginning of this
year and has a number of international banks on board,
including Commerzbank, Société
Générale and Standard Chartered, which joined in
June.

This platform is being marketed on its ease of use
– there is no need for additional software as it is
run through standard web browsers. With the high cost of
implementing new platforms potentially a deterrent, Ken
provides a lower cost alternative. It also claims that
information can be passed between parties in just one
minute.

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